Back on June 4th of this year the S&P 500 closed at 1,277, down a gut wrenching 9% from the previous month. Toronto didn’t fare any better, as it too dropped by 9%. Those who told you to sell in May looked pretty smart. The daily headlines went from bad to worse as we feared a Greek exit from the Euro which many thought would lead to a full-scale global meltdown. Each weekend we had to prepare ourselves for another vote, election or summit that would have world altering consequences. On June 4th, I felt it was necessary to put this panic into perspective and remind myself as well as my clients that selling into the panic would have been the absolute wrong reaction. I listed the following points that all investors needed to consider before taking any action. They were the following:
- Year over year growth in corporate profits, retail sales, auto sales, rail car loadings,port traffic, durable goods, employment, housing activity and bank lending
- S&P 500 trading at 13.1 times last year’s earnings and possibly 12 times this year’s expected earnings – historically very cheap
- S&P 500 dividend yield at highest level since 1995 (excluding generational low of 2008)
- Since 1953, the 10-year treasury yield has exceeded the S&P 500 dividend yield 90% of the time. Now S&P 500 dividend yield is almost 1% higher than 10-year treasury yields
- The last two times the S&P 500 dividend yield exceeded the 10-year treasury yield, March 2009 and September 2011, a huge rally followed
- Earnings yield (S&P 500 earnings divided by S&P 500) at highest level since 1988
- Earnings risk premium ( spread between earnings yield and risk-free bond yields) at record highs
- North American economy in expansion, U.S. and Canadian GDP on track for 2% growth
- Drop in commodity prices is healthy for the economy
- Corporate balance sheets are rock solid.
- Banks are well capitalized
Wouldn’t you know it , the world has moved on. The S&P 500 is now above May’s level and the TSX is one good day away from eclipsing its May high. No one, including me, knows what will happen next in the market, but I can guarantee one thing, if you do cash out your portfolio without putting things into perspective you will lose.